The Incredible, the OK and the Truly Awful
Tideway Market Update, 23/11/2020
A second Covid wave and further lockdown restrictions in Europe have ensured we have a full blown, self-induced recession on our hands in case anyone had not noticed. As predicted by TS Lombard back in April, the impact is now being fully felt and looks like continuing well into 2021.
However, it is a recession like none we have seen before. Many people are still enjoying good incomes and are spending a great deal less. Personal savings ratios are increasing, interest rates are low, money is cheap to borrow and there is now no return on cash. Some businesses are thriving, some are doing OK and some are in real trouble.
To highlight this, I shall look at three companies that have announced results this week or are about to make an announcement next week:
- Microsoft (I’m pleased to say, our biggest holding on a look through of our equity funds) announces next week and analysts fully expect the 18th year on year quarterly gains in revenues and profits. They have doubled their revenues since 2017. Their shares are up around 35% year to date.
- Pernod Ricard, purveyors of Jameson Whiskey and Havana Club Rum announced sales down 9.5% this week. Profits have been hit hard but are recovering and sales are increasing again in the US, China and India. Their shares are off about 8% year-to-date but have been rising steadily since the March low. Pernod Ricard is a classic well-regarded consumer discretionary stock. I think they will be fine. Lindsell Train love these types of companies.
- IAG, owners of airlines BA and Iberian confirmed yesterday they lost $1.5bn in the last 3 months versus a $1.6bn profit for the same quarter last year, they have just about 3 quarters’ worth of liquidity if losses continue at this level. They are not alone; American Airlines are in similar shape. In Nick’s absence today I checked all the value managers’ fact sheets and was relieved not to see IAG in any of their top 10 holdings. We may have had exposure earlier in the year but it was small and if we have any today it will be tiny. IAG shares are off 83% year-to-date and have kept falling even since the March collapse.
Of course, while looking at share prices we should remember most of you own more bond funds than equity funds with Tideway and these have been doing very nicely in the last few weeks as interest rates have softened again in Europe. Our two biggest holdings in the Sanlam Credit and Hybrid Capital Bond funds have both gone into profit for 2020 during October on a total return basis.
Are we worried about Brexit and Tier 2 or 3 rules? Not really! If you check the constituents of the MSCI world index from September, UK equities now make up 4.05% of the world index. This is on a weighted bases, on the value of companies. Apple alone is weighted at 4.46% – now worth more than BP, Shell, Glaxo, HSBC and all those UK blue chips put together. How quickly that has happened! In 1992, UK shares made up over 12% of the index, so have fallen 2/3rds in value relative to the rest of the world.
The UK is a great place to live and we have some of the best fund management talent in the world but unfortunately, we just don’t have companies who can compete on a global basis with the likes of Apple and Amazon.
US tech companies may get a push back if there is a Biden victory in the forthcoming US election but the TINA syndrome (There Is No Alternative – place to put your money) coupled with increasing global demand to invest money should ensure continued growth in share prices overall, and in the long term maybe some of our UK and European companies can catch up a bit.
So as the nights get longer, the rains come down and UK politicians continue to disappoint us, don’t panic, in the rest of the world somewhere the sun is shining, and Aviva will still keep paying us our bond coupons, even if they don’t know how on earth to grow their profits!
One final thought, it could be a lot worse. I have not looked for a while, but I thought, given their debacle with the Woodford funds, that we would have achieved a decent out-performance versus the Hargreaves Lansdown multi-manager funds. Ben sent me the chart below comparing these funds to our medium risk, Stable Return Three portfolio and I wasn’t wrong.
There is £1.9bn of unfortunate investors’ money in the purple Income and Growth fund and about £3.4bn in all three funds. If you know any investors in these funds, you might send them this mail! These funds have annual costs that are about two and half times the average costs of funds we invest in and still you don’t get any advice from HL; you have to pay for that separately.
On a more serious note, I think it shows we have been moving in the right direction, especially since the start of 2019, to stay loyal to our bond funds and to globally diversify our equity funds. It goes without saying of course that the value of investments and the income they produce can go down as well as up and past returns are no guarantee of future returns.
The Tax Efficient Nature of Pension Contributions
Tideway Market Update, 06/11/2020